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CHAPTER 2: INTRODUCTION TO TRANSACTION PROCESSING

FINANCIAL TRANSACTION
 An economic event that affects the assets and equities of the firm, is reflected in
its accounts, and is measured in monetary terms
 Similar types of transactions are grouped together into three transaction cycles:
 Expenditure Cycle
 Conversion Cycle
 Revenue Cycle

RELATIONSHIP BETWEEN TRANSACTION CYCLES

EACH CYCLE HAS TWO PRIMARY SUBSYSTEMS


1) EXPENDITURE CYCLE: time lag between the two due to credit relations with
suppliers (Expenses)
 Physical Component (acquisition of goods)
 Financial Component (cash disbursements to the supplier)
2) CONVERSION CYCLE (Manufacturing)
 Production System (planning, scheduling, and control of the physical
product through the manufacturing process)
 Cost Accounting System (monitors the flow of cost information related to
production)
3) REVENUE CYCLE: time lag between the two due to credit relations with
customers (Internal Process of the Company)
 Physical Component (sales order processing)
 Financial Component (cash receipts)

MANUAL SYSTEM ACCOUNTING RECORDS


1) Source Documents
 Used to capture and formalize transaction data needed for transaction
processing
2) Product Documents
 The result of transaction processing
3) Turnaround Documents
 A product document of one system that becomes a source document for
another system
 Di ka proceed ang other document without the other
4) Journals (a record of chronological entry)
 Special Journals
- Specific classes of transactions that occur in high frequency
 General Journals
- Nonrecurring, infrequent, and dissimilar transactions
5) Ledger (a book of financial accounts)
 General Ledger (Internal Recording)
- Shows the activity for each account listed on the chart of accounts
 Subsidiary Ledger (External Recording)
- Shows the activity by detail for each account type
FLOW OF INFORMATION FROM ECONOMIC EVENT INTO THE GENERAL LEDGER

SUBSIDIARY LEDGER = GENERAL LEDGER

ACCOUNTING RECORDS IN A COMPUTER-BASED SYSTEM

EXPLANATION OF STEPS IN
FIGURE:

1. Compare the AR balance in the


balance sheet with the master file
AR control account balance.

2. Reconcile the AR control figure


with the AR subsidiary account total.

3. Select a sample of update entries


made to accounts in the AR
subsidiary ledger

and trace these to transactions in


the sales journal (archive file).

4. From these journal entries,


identify source documents that can
be pulled from their files and
verified. If necessary, confirm these
source documents by contacting the
customers.

*Accounts Receivable – most reliable


AUDIT TRAIL

 Accountants should be able to trace in both directions.


 Sampling and confirmation are two common techniques.

EXAMPLE OF TRACING AN AUDIT TRAIL (VERIFYING ACCOUNTS RECEIVABLE)

COMPUTER-BASED SYSTEMS
 The audit trail is less observable in computer-based systems than traditional
manual systems
 The data entry and computer programs are the physical trail
 The data are stored in magnetic files
COMPUTER FILES
1) Master File
 Generally contains account data
 (e.g,, general ledger and subsidiary file)
2) Transaction File
 A temporary file containing transactions since the last update
3) Reference File
 Contains relatively constant information used in processing
 (Ex: tax tables, customer addresses)
4) Archive File
 Contains past transactions for reference purposes

DOCUMENTATION TECHNIQUES
 Documentation in a CB environment is necessary for many reasons
 Five Common Documentation Techniques:
1. Entry Relationship Diagram (ERD)
- A documentation technique to represent the relationship between
entities in a system
- The REA model version of ERD is widely used in AIS
- REA uses 3 Types of Entities:
 Resources (cash, raw materials)
 Events (release of raw materials into the production process)
 Agents (inventory control clerk, vendor, production worker)
- Cardinalities
 Represent the numerical mapping between entities:
o One-to-one
o One-to-many
o Many-to-many
2. Data Flow Diagrams
- Uses symbols to represent the processes, data sources, data flows,
and entities in a system
- Represent the logical elements of the system
- Do not represent the physical system

3. Document Flowcharts
4. System Flowcharts
- Illustrate the relationship among processes and the documents that
flow between them
- Contain more details than data flow diagrams
- Clearly depicts the separation of functions in a system
- Are used to represent the relationship between the key elements –
input sources, programs, and output products – of computer
systems
- Depict the type of media being used (paper, magnetic tape,
magnetic disks, and terminals)
- In practice, not much difference between documents and system
flowchart
- SYMBOL SET FOR REPRESENTING MANUAL PROCEDURES

- SYMBOL SET FOR REPRESENTING COMPUTER PROCESSES


5. Program Flowcharts
- Illustrates the logic used in programs
- PROGRAM FLOWCHART SYMBOLS

MODERN SYSTEMS VS LEGACY SYSTEMS


 Modern Systems Characteristics
o Client-server based and process transactions in real time
o Use relational database tables
o Have high degree of process integration and data sharing
o Same are mainframe based and use batch processing

 Some Firms Employ Legacy Systems for Certain Aspects of their Data
Processing
o Accountants need to understand legacy systems

 Legacy Systems Characteristics


o Mainframe-based applications
o Batch oriented
o Early legacy systems use flat files for data storage
o Later legacy systems use hierarchical and network databases
o Data storage systems promote a single-user environment that
discourages information integration

RECORD STRUCTURES FOR SALES, INVENTORY, AND ACCOUNTS RECEIVABLE


FILES

DATABASE BACKUP PROCEDURES


 Destructive updates leave no backup
 To preserve adequate records, backup procedures must be implemented as
shown below:
o The master file being updated is copied as a backup
o A recovery program uses the backup to create a pre-update version of the
master file
COMPUTER-BASED ACCOUNTING SYSTEMS
 Broad Classes of Systems
1. Batch Systems
- BATCH: group of similar transactions that are accumulated over
time and then processed together
- The transactions must be independent of one another during the
time period over which the transactions are accumulated in order
for batch processing to be appropriate
- TIME LAG: exists between the event and the processing
- BATCH PROCESSING/SEQUENTIAL FILE

- STEPS IN BATCH PROCESSING / SEQUENTIAL FILE


o Keystroke
 Source documents are transcribed by clerks to
magnetic tape for processing later

o Edit Run
 Identifies clerical errors in the batch and places them
into an error file
o Sort Run
 Places the transaction file in the same order as the
master file using a primary key
o Update Run
 Changes the value of appropriate fields in the master
file to reflect the transaction
o Backup Procedure
 The original master continues to exist and a new
master file is created

- ADVANTAGES OF BATCH PROCESSING


o Organizations can increase efficiency by grouping large
numbers of transactions into batches rather than processing
each event separately
o Batch processing provides control over the transaction
process via control figures

2. Real-time Systems
- Process transactions individually at the moment the economic
event occurs
- Have no time lag between the economic event and the processing
- Generally requires greater resources than batch processing since
they require dedicated processing capacity; however, these cost
differentials are decreasing
- Oftentimes have longer systems development time
- Process transactions individually at the moment the economic
event occurs
- Have no time lag between the economic event and the processing
- Generally requires greater resources than batch processing since
they require dedicated processing capacity; however, these cost
differentials are decreasing
- Oftentimes have longer systems development time

CHARACTERISTIC DIFFERENCES BETWEEN BATCH AND REAL-TIME


PROCESSING

DISTINGUISHING DATA PROCESSING METHODS

CHARACTERISTIC BATCH REAL-TIME

Lag exists between time when


Processing takes place when the
Information Time Frame the economic event occurs and
economic event occurs
when it is recorded

Generally, fewer resources


More resources are required than
Resources (hardware, programming,
for batch processing
training) are required

Certain records are processed


All records pertaining to the event
Operational Efficiency after the event to avoid
are processed immediately
operational delays

WHY DO SO MANY AIS USE BATCH PROCESSING?


 AIS processing is characterized by high-volume, independent transactions, such
are recording cash receipts checks received in the mail
 The processing of such high-volume checks can be done during an off-peak
computer time
 This is one reason why batch processing maybe done using real-time data
collection
USES OF CODING IN AIS
1) Concisely represent large amounts of complex information that would otherwise
be unmanageable
2) Provide a means of accountability over the completeness of the transactions
processed
3) Identify unique transactions and accounts within a file
4) Support the audit function by providing an effective audit trail

SEQUENTIAL CODES
- Represent items in sequential order
- Used to prenumber source documents
- Track each transaction processed
- Identify any out-of-sequence documents
- DISADVANTAGES:
o Arbitrary Information
o Hard to make changes and insertions

BLOCK CODES
- Represent whole classes by assigning each class a specific range within the
coding scheme
- Used for Chart of Accounts
o The basis of the general ledger
- Allows for the easy insertion of new codes within a block
o Don’t have to reorganize the coding structure
- DISADVANTAGES:
o Arbitrary Information
GROUP CODES
- Represents complex items or events involving two or more pieces of data using
fields with specific meaning
- DISADVANTAGES:
o Arbitrary Information
o Overused

ALPHABETIC CODES
- Used for many of the same purposes as numeric codes
- Can be assigned sequentially or used in block and group coding techniques
- May be used to represent large number of items
o Can represents up to 26 variation per field
- DISADVANTAGES:
o Arbitrary Information

MNEMONIC CODES
- Alphabetic characters used as abbreviations, acronyms, and other types of
combinations
- Do not require users to memorize the meaning since the code itself is informative
– and not arbitrary
- EX: NY = New York
- DISADVANTAGES:
o Limited usability and availability

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